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Ending the CEO’s Worst Nightmare: Disruptive Innovation

Setting an organization’s path for continuous innovation may be the only way not to be outflanked by disrupters, but it implies radical rethinking of how the enterprise functions.

In 2004, researchers at Nokia, the world’s leading mobile phone company, presented a prototype of a new kind of mobile phone to the senior management. The phone, which connected to the Internet, had a large bright screen and was operated by fingers on a touch-screen. The researchers believed that the device would be a winner in the fast-growing Smartphone market. Senior management evaluated the proposal and decided that the risks of failure did not warrant the costs: Nokia did not pursue development of the phone.

In 2007, Apple introduced the iPhone with precisely the features that Nokia’s management had opted not to pursue. By 2010, Nokia’s market share in Smartphones has been devastated. In the United States, its share of the Smartphone market has slipped from 35 percent in March 2002 to 8 percent in April 2010. Since 2007, Nokia shares have lost almost half their value. Even today the world is still waiting for Nokia’s response to the iPhone, as software errors have delayed shipments of its long-awaited N8 touch-screen phone.

Not surprisingly, Nokia’s CEO has recently been replaced—yet another CEO victim of disruptive innovation.

The most frightening thing about disruptive innovation—the phenomenon documented in Clayton Christensen’s The Innovator’s Dilemma (HBSP, 1997) in which market-leading companies in industry after industry have missed game-changing transformations—is that the mistakes are not the result of “bad” management. Instead, as Alan Murray has noted in The Wall Street Journal, the disasters have occurred because managers were following the dictates of “good” management. They studied their customers. They carefully researched the market and new technologies. They meticulously cultivated innovation. They stringently evaluated new development and weighed the cost of new investment against potential gains. And in the process, they missed disruptive innovations that opened up new customers and markets for alternative blockbuster products.

How can CEOs enable their firms to evolve beyond “good” traditional management and make them as adept at handling disruptive innovation as they have been at implementing disciplined execution? How can innovation become an organization-wide capability, a part of the firm’s DNA?

In one sense, the answer is simple: commit the firm to continuous innovation and focus everyone and everything in the firm on that goal. Thus the new CEO of Nokia doesn’t have to go far to find the cause of its Smartphone disaster: the complacency is visible on Nokia’s own website, which still proudly proclaims that “Nokia is the world leader in mobility”. From this static perspective of Nokia’s role in the world, any expensive investment in an innovation for which the market response is inherently uncertain is bound to appear too risky to attempt. Instead, Nokia’s CEO needs to commit everyone and everything to providing a continuous stream of new value for customers sooner. That message needs to be reflected in every communication and every action that management takes.

Yet making that happen in an established organization is far from simple, because creating a capability for continuous innovation is not a matter of adding something on to the existing management system. Rather it involves radically re-thinking the very fundamentals of how work is structured and how the firm is managed.

Continuous innovation implies fundamental changes in the way most established organizations are structured and run. That’s because traditional command-and-control bureaucracy is constitutionally unsuited to continuous innovation. It’s too slow, insufficiently agile and too internally focused to be responsive to customer needs.

Once a firm commits to the goal of constantly increasing the value of what it offers to its customers and delivering it sooner, it will naturally gravitate towards the seven principles of radical management, i.e. focusing the entire organization on delighting clients; working in self-organizing teams; operating in client-driven iterations; delivering value to clients with each iteration; fostering radical transparency; nurturing continuous self-improvement and communicating interactively.

The principles of radical management first emerged in isolated pockets of the economy—particularly software development, car manufacturing and successful startups. They are now spreading to other sectors, such as finance, consulting, construction and manufacturing, and in effect, the entire economy.

This radically different way of managing requires that everyone and everything in the organization be focused on the goal of constantly increasing the value of what the organization offers to its clients and delivering it sooner. That’s because it is only through mobilizing the full energy and ingenuity of the entire workforce that the firm can generate the continuous value innovation needed to survive in today’s marketplace.

Do the benefits of radical management warrant the cost of such a transition? The most important benefit is that the firm—and the CEO—may survive. The life expectancy of firms in the Fortune 500 has already declined to around 15 years, and, according to Deloitte’s Center for the Edge, is heading towards 5 years, unless traditional management is transformed.Focusing the firm on continuous innovation through radical management also leads simultaneously to major gains in productivity, continuous innovation and deep job satisfaction for those doing the work. It is only when these keys are in place that a CEO can be assured that the organization is up to the challenge of coping with disruptive innovation.

Stephen Denning http://www.stevedenning.com is the author of The Leader’s Guide to Radical Management: Reinventing the Workplace for the 21st Century (Jossey-Bass, 2010), which describes the seven principles of radical management, as well as more than seventy supporting practices. His other books include The Secret Language of Leadership (Jossey-Bass, 2007) and The Leader’s Guide to Storytelling (Jossey-Bass, 2005). The former program director for knowledge management at the World Bank, Denning consults with organizations in the US, Europe, Asia, and Australia in the areas of leadership, management, innovation, and business narrative and radical management. Find his blog: http://stevedenning.typepad.com

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